Happy 5th birthday Obamacare, now what?

The Affordable Care Act (ACA), like President Clinton’s health plan in the 1990s, made the mistake of trying to achieve coast-to-coast health care coverage with a system that essentially looks the same everywhere. That approach was always going to be a challenge. US health care is an enormous and complex economy in its own right. If the US health system were a separate national economy, for instance, it would be the fifth largest economy in the world – larger than the entire economy of France or of Britain. The idea that a single piece of legislation could successfully reorganize the world’s fifth largest economy was a fantasy, especially when the bill had to go through the congressional sausage-making machine.

It’s true that the ACA gave Americans a choice of plan on federal or state-run exchanges. But the ACA still sought a template for insurance rules, benefits and other structural features that would be the same from Vermont to Texas and Florida to Alaska. That was unwise. The continuous political warfare since the enactment of the legislation reflects the fact that different parts of the country have very different views of how health care should be organized.

On this fifth anniversary of the ACA this week, both proponents and opponents of the program should pause to consider what we actually mean by an “American” health care system. Much like we think of an American K-12 education system, we really mean this: a set of national values and goals about health coverage and services that characterizes healthcare for all Americans, but a variety of pathways for reaching those objectives.

Americans actually agree on the broad objective of access to at least a basic set of health services that are affordable both for individuals and taxpayers. There is debate at the margin about what level and quality of services counts as “basic,” and what conditions might be applied under certain circumstances – such as some form of work requirement for able-bodied adults seeking Medicaid coverage. There is also disagreement about the appropriate degree of involvement by government. Still, there is a good measure of agreement on what we might call the “philosophy” of a health system, or in other words its broad goals and values.

The really intense disagreement is about the “engineering” of a system, particularly when engineering elements of a national program conflict with what some see as bedrock principles. The strong objection to mandates requiring particular forms and levels of coverage is an example.

The solution to these conflicts over engineering is to allow different structures to be adopted. That permits us to explore the best technical ways to, say, provide quality but affordable services to low-income families or organize insurance markets such that they are stable and efficient. Different approaches also permit regional diversity within the broad bounds of national values and goals.

Amending the ACA to unleash federalism and permit states much greater flexibility to innovate is the way to achieve such a truly American health system.

This is already happening to a modest degree since the Supreme Court struck down the ACA’s requirement that all states increase Medicaid eligibility to 138% of the federal poverty level. Using its limited waiver authority, the Administration has been negotiating with such states as Arkansas and Indiana on a variety of ways to subsidize coverage for individuals who would otherwise have been covered by Medicaid – but where the state objected to Medicaid’s engineering.

But we need to go much further. In 2004, well before President Obama was elected and prospects for national legislation on coverage were very dim, I co-authored a proposal that would have allowed states to pursue virtually any plausible approach to increase coverage. States would have had to offer a plan that met certain conditions, such as not discriminating against high-cost individuals, and achieving expanded coverage. Rather than seek a federal waiver for plans, groups of states – likely combinations of liberal and conservatives states – would have been able to apply for congressional approval of their proposals after clearance from a state-federal commission.

While my co-author feels the ACA is the national legislation that makes our 2004 proposal undesirable now, I believe that a version of it is exactly the approach needed to develop an American health system that addresses today’s engineering disputes – including dealing with the fallout from a King v. Burwell Supreme Court decision favoring the plaintiffs.

The vehicle for a revamped version of that 2004 proposal is, ironically, within the ACA itself. In urging Republicans to adopt a different strategy on the ACA, I’ve pointed out that Section 1332 of the ACA would allow states sweeping flexibility to achieve the coverage requirements of the law. The flexibility includes exemptions from employer and individual mandates, and abandoning exchanges for other ways of organizing a market for plans.

The snag is that the provision does not kick in until 2017 and would require Administration approval – so President Obama’s successor could nix a state plan he or she opposed.

Like others, I believe the right strategy now is to do at least two things:

1. Advance the effective date of 1332 to at least 2016, and better yet, even earlier if a King decision this summer blocks subsidies to federal exchanges.

2. Reduce the power of any White House to thwart a state solution either by legislating automatic approval of categories of state approaches or by a process that makes congressional approval an alternative to an Administration waiver.

In parallel with this state-led strategy to allow an assortment of engineering approaches to building a national system, we also need to unleash states to become a key player in tackling health care spending. The way to do that is to give states an incentive to propose strategies that combine private, as well as state and federal initiatives that could reduce the total costs of Medicare, Medicaid and other programs by allowing the states to negotiate a share of the demonstrated savings.

After five years of the ACA, the Obama Administration and many congressional supporters of the ACA still seem to see state flexibility as a concession, even a necessary evil. But if we are to achieve an American health system that works effectively and in the future can gain wide support, the states need to be at its very center.

Stuart Butler is a Senior Fellow in Economic Studies at The Brookings Institution.

5 trends that will redefine your healthcare experience in 2015

Technology has revolutionized many aspects of our lives (there seems to be an app for almost everything these days), but our modern healthcare system has remained largely on the sidelines of this transformation.

One small example: Electronic health records have existed for more than 30 years. As of 2008, only 38% of office-based physicians had converted to e-records, according to the Centers for Disease Control. That number increased to about 78% of office-based physicians as of 2013, but it shows how slow the healthcare industry is to adopt new digital tools.

Technological progress in the industry is more of a steady slog than headline-making disruption, but that doesn’t mean there aren’t big things happening. Here are five important trends that will shape your healthcare experience this year and beyond.

How to cut America’s crazy high health care costs

After decades of false starts and frustration, free market champions should be cheering— competitive marketplaces work in health care. And no matter what your opinion of Obamacare, you have got to admit, that’s a good thing.

It’s now been about a decade since President George W. Bush enacted Medicare Part D — a competitive market for drug benefit plans with government set ground rules. Competing plans have to comply with benchmark regulations—for instance, they have to cover two or more drugs in each drug category—but otherwise, they are free to set their formularies, premiums, tiering arrangements and co-pays.

How has it worked? Today, there are over 1,000 plans offered in Part D, and beneficiaries all over the county have a wide variety of choices. Even seniors in rural states such as Alaska can choose from over 24 plans. Medicare Part D has cost below all government projections since its inception. In 2013, it was 50% below what the Congressional Budget Office originally estimated. Cumulatively, over its nine years, Medicare Part D has cost $197 billion less than projected. While there are many reasons for the lower than expected costs, including many heavily used brand named drugs losing patent protection, the CBO recently reported: “a larger number of plan sponsors in a region was associated with lower bids.” Plans have figured out how to stay profitable with lower bids by, for instance, promoting the use of generic drugs among their beneficiaries. It is no wonder, then, with low costs and high choice, the vast majority of Medicare beneficiaries are satisfied with their drug plan.

Almost the same thing has happened in the purchase of durable medical equipment. The same law that gave us Medicare Part D also gave us an experiment with competitive bidding for hospital beds, wheelchairs, oxygen equipment, prostethesis, and many other items used by seniors and paid for by Medicare. In the past, Medicare would set prices according to a fee schedule. With competitive bidding, manufacturers are pitted against one another. The Affordable Care Act will expand this program nationwide by 2016 unless Congress votes to prevent it.

The result has been what free-market competition would predict — huge savings. On average, expenditures for this equipment dropped 42%. And the government’s actuary anticipates nearly $26 billion in total government savings and $17 billion in out-of-pocket savings for seniors by 2022. Despite industry-funded complaints about seniors losing access to necessary equipment, studies have not shown problems.

Additional proof that competition can moderate costs in health care is evident in Obamacare’s health insurance exchanges. A recent evaluation by Kaiser Health News of the 2015 premiums for the lowest cost silver plan in 34 states with federally operate exchanges show that counties in which there were no new insurers in the market premiums increased an average of 7% whereas in those with at least one new insurer, premiums increased just 1%. The exchanges are another triumph for market competition.

There is more we can do to stimulate more competition and lower prices in health care.

First, Medicare could use some help to improve the competitive bidding process so gaming is reduced, the bids are binding, and quality is guaranteed. I have long proposed having a board of experts from business and academia to advise Medicare on doing competitive bidding right. In addition, Congress should also expand competitive bidding beyond medical equipment to things like automated laboratory tests, X-rays, and anything else that an advisory board thinks is amenable to competitive bidding.

Second, Medicare Part C—the privately-run Medicare Advantage plans—should also be shifted to a better competitive bidding process. About 30% of Medicare beneficiaries are now enrolled in Part C—and it is expanding fast. The current bidding process is extraordinarily complicated. And, Medicare overpays. On average, before the Affordable Care Act, Medicare paid Part C plans 114% of what the services would cost if provided in traditional Medicare. Today, because of the ACA, it is down to 106% — still overpaying. Instead of linking payments to a government-set benchmark, payments should be linked to what insurers actually bid to provide the established basket of services to seniors with bonuses for those plans that rank higher in terms of quality. Such competition gets the government out of price setting and incentivizes low cost-high quality care.

Third, we can encourage more competition in the exchanges. To do this, we need to boost enrollment in order to make it more enticing for insurers to enter the market. Merging the exchange for small businesses into the exchanges for individuals could accomplish this. In addition, competition on price and quality could be facilitated by only allowing a certain number of plans per insurer at each metal level based on premiums, and setting minimum quality standards. This would incentivize them to offer cheaper plans.

Finally, we need more price and quality transparency. Car dealers are required to stick to the MSRP and quality standards on the windows of all the new cars they sell. Why shouldn’t hospitals and other providers publish their “all-in” prices and quality standards for standard elective procedures—such as MRIs and knee replacements—as well? This will facilitate consumers being able to shop around for the best-value care and create competition among providers.

We have significant evidence that market competition works to control health care costs—just like in other industries. While some market-oriented proposals would leave patients with stingier coverage or higher costs, the reforms detailed here would improve patient choice and lower costs. With the American people standing to benefit both as health care consumers and as taxpayers, the government should push where it can to expand competition and save us all more money.

Ezekiel J. Emanuel is an oncologist and Chair of the Department of Medical Ethics and Health Policy at the Perelman School of Medicine at University of Pennsylvania. He is also author of Reinventing American Health Care.

How to guard against outliving your money

The retirement security landscape in the U.S. has undergone a dramatic shift over the past 25 years. While Social Security remains a bedrock, private-sector pensions are nearly extinct and have been replaced with 401(k)-type accounts managed by workers themselves. Accumulated financial assets in 401(k)s and IRAs have soared, reaching $13.8 trillion by mid-2014—up from just $5.6 trillion in 2000. This transformation has created a new challenge for American retirees—how to spend their wealth in a way that will ensure they have enough left to live comfortably throughout retirement, no matter how long it lasts.

A host of risks threaten retirees’ attainment of financial security, including uncertain returns to their investments, higher-than-expected inflation, and the chance of facing high out-of-pocket health care spending. But perhaps the greatest risk faced by today’s retirees is the risk of unexpected longevity. In and of itself a good outcome, the chance of living a long time often means that retirees must oversave— or underspend—to be confident they will not run out of money. This uncertainty is severe. While the median 60-year-old female will live to age 84, there is a 10% chance the 60-year-old will not make it to age 70 and a 10% chance she will live past age 94. A 60-year-old man faces a similarly wide range of possible lifespans.

Longevity annuities might be an answer. They’re an insurance product uniquely designed to protect against the risk of outliving your money. Like a standard annuity, a longevity annuity pays a fixed amount for as long as the policy holder is alive. But unlike a standard annuity, a longevity annuity only begins to pay benefits after a fixed period—typically 10, 15, or even 20 years.

This deferral means that many annuitants will never receive a dollar in benefits, and that’s exactly the point. Like any other form of insurance, longevity annuities only pay out if the outcome being insured against is realized. Policy holders who live well past their life expectancy can rely on payments from a longevity annuity to shore up their retirement finances. Those who pass away before the deferral period ends won’t need to rely on those payments for financial security.

The long deferral period also means that longevity annuities are remarkably inexpensive relative to immediate annuities. At current prices, while a $100,000 premium will buy a 60-year-old male an immediate monthly payment of around $535, the same $100,000 premium will buy him a monthly payment of around $2,540 if purchased with a 20-year deferral. Practically speaking, this means that newly retired individuals need to spend much less to guarantee a given stream of income in late old age.

Academic work on longevity annuities has estimated that the optimal amount to spend on longevity insurance is about one-eighth of a retiree’s financial assets. Spending that amount leaves a majority of wealth available to ensure against other risks and to invest in other priorities, such as long-term care needs or leaving an inheritance to children, while still being protected against outliving one’s assets. During the waiting period before benefits begin, retirees can draw down remaining financial wealth, tap into housing equity, or continue to receive income from work to supplement Social Security and Medicare benefits.

The U.S. Treasury recently has taken important steps to pave the way for this market. In July, Treasury issued final regulations making it easier for retirement savers to purchase a longevity annuity with funds from a 401(k) account or IRA, and last month the Treasury and IRS issued landmark guidance explicitly permitting deferred annuities to be offered as a default investment to workers who are automatically enrolled in workplace retirement saving accounts.

But more remains to be done. As we discuss in a newly released paper, a range of policy actions—from better financial education for consumers to protections for responsible employers who select an insurance company to provide annuities for their employees to revised state rules governing how insurance companies are allowed to market their products—can bolster the fledging market for longevity annuities. The challenge for policymakers moving forward is to provide greater access to these products, while also maintaining consumer and regulatory safeguards designed to prevent abuse.

The bottom line is that the fundamental ongoing shift in the structure of employer retirement plans has not been accompanied by sufficient mechanisms to help retirees turn their retirement wealth into retirement security. As company pensions grow even rarer, longevity annuities could offer a cost-effective alternative. We can do better than having retirees attempt to save like hell and hope not to live too long.

Katharine Abraham is a professor at the University of Maryland, and served from 2011–2013 as a Member of the President’s Council of Economic Advisers. Benjamin Harris is a Fellow in Economic Studies and Deputy Director of the Retirement Security Project at the Brookings Institution.

‘Tis open enrollment season: How to pick the right health insurance

It’s open enrollment time … again. If it doesn’t seem like a full year has gone by since you heard about this, that’s because in many places it hasn’t. Open enrollment for insurance purchased through the exchanges created by the Affordable Care Act didn’t end until March 31 of this year (and some states got extensions until mid-April).

If you’re purchasing your own coverage via the exchanges, you won’t have as much time this year. Open enrollment begins November 15 and ends February 15. And if you want your coverage to kick-in January 1, you have to pull the trigger by December 15. Medicare Open Enrollment – the time when all people with Medicare can change their health plan or prescription drug plan – is even shorter. It began October 15 and ends December 7. And if you are choosing a health plan from a menu your employer provides, your window may be shorter still.

So, this week I’ve pulled together some tips on making the right decision no matter where you’re shopping.

The Exchanges

If this is your second go-round with the exchanges and you do nothing, in most states, you’ll be re-enrolled automatically, says Don Silver, author of Obamacare 2015. “The problem is there are [many] ways re-enrollment can hurt you. That’s why he suggests that even people who have been happy with their plans go through the enrollment – and subsidy determination – process all over again.

Why? Prices have gone up, for one thing. Monthly health insurance premiums are projected to go up by an average 8%, according to Carrie McLean, Director of Customer Care ehealthinsurance.com. That’s average, she notes. “Some rates may go down. Others may go up by as much as 20%.” In addition, your plan may change. Many plans are ending, because they don’t cover the categories of benefits they are required to cover under the ACA, explains Cheryl Fish-Parcham, Private Insurance Programs Director with Families USA. Your insurer, though, likely wants to keep you and so they’ll send you a letter telling you that if you continue to pay your premiums you’ll be transitioned into a new plan. Look at it very carefully, McLean advises. There may be a rate increase. Your doctor may or may not be in the new plan. The prescriptions you take may or may not be on the formulary. Don’t just go along for the ride.

Whatever you do, don’t go without coverage. The penalties for not having coverage are rising substantially in 2015. If you want to see how much you’ll be on the hook for if you don’t buy insurance, this calculator from insurancequotes.com will give you a peek.

Medicare

This year, we’re seeing some reduction in the number of Medicare Advantage plans nationwide, says Juliette Cubanski, associate director of the program on medicare policy at Kaiser Family Foundation. That’s not necessarily bad news, she notes. “There are also a lot of plans coming into market. A lot of plans leaving market tend to be at or below average in terms of quality. People might have access to a higher quality set of plans in 2015.”

Bottom line: If the company you’re with is leaving the market, you’ll have to shop for a new plan. If the company is staying, but the plan is being eliminated, you may be shifted into the new plan automatically. For the same reasons I mentioned above, be careful of this.

Even if your plan isn’t exiting the market, Cubanski recommends taking a look at it to see if it still serves your needs. Monthly premiums on Medicare Advantage plans are going up an average of 4%. While that’s not drastic, a change in your plan’s formulary, or a change in the prescriptions you’re taking, might dictate making a change.

Finally, a bit of good news all around: One of the provisions of the ACA was the closing of the donut hole – the coverage gap that consumers had to fill – and that’s happening. “In 2015, when you reach the gap you’ll pay 65% of the cost of generic prescriptions and 45% of cost of brand name,” she says. That’s an improvement.

Employer-Based

The biggest change happening in employer-based health insurance is the shift away from traditional policies to high-deductible policies coupled with a health savings account – i.e. consumer-driven healthcare. This has been going on for several years, but it’s continuing. According to a survey from Aon Hewitt, 15% of companies surveyed now offer these plans as their only option, and another 42% of employers are looking at moving in that direction. Why are they doing this? They want you more involved, says Craig Rosenberg, Practice Leader for the Health and Welfare Benefits Group.

If your employer has jumped on board, you should know that with these plans, preventative care will be offered for free. But for everything else, you’ll need to set aside savings until you satisfy your deductible. That’s where a health savings account comes in. Some employers will make contributions to an HSA on your behalf. Others will allow you to do it with paycheck deductions. Some will do a combination of both.

Rosenberg suggests approaching the process holistically. “The price to purchase this policy is likely lower than a traditional plan. So, you could put for example some of that savings into a HSA. The HSA has a lot of tax advantages,” he notes. “Your contributions are tax free, any earnings or investment growth is tax free, and you can use it for healthcare expenses tax free.”

The other trend in employer provided healthcare is that more employers are offering incentives that promote healthy behaviors. You may be offered cash – or a lower price on your premiums – for taking a health screening or completing a health risk questionnaire. Blow these things off at your own peril. There are often hundreds of dollars there for the taking.

Vertex gets tangled in Medicaid lawsuit

Arkansas Medicaid patients are fighting to get the drugs they need, and at the heart of the matter is Vertex Pharmaceutical’s VRTX $300,000-a-year cystic-fibrosis drug.

Three people suffering from cystic fibrosis have brought a case against state Medicaid officials, alleging that they were denied access to Kalydeco due to it’s high cost. The denial is a violation of their civil rights under federal laws governing Medicaid, the claimants say.

To have a drug covered under Medicaid, patients must meet all the eligibility requirements outlined by the Food and Drug Administration when it approved the drug. State Medicaid programs must cover the cost for most FDA-approved drugs, unless there is an equivalent–and less expensive–option available.

A drug like Kalydeco, which targets a gene that causes cystic fibrosis, has no equivalent. In such cases, states can demand proof that doctors are using the medicine in medically appropriate ways.

However, Arkansas state officials have gone a step further and said patients must prove their disease has failed to improve from older, less-costly therapies. Doctors say that requirement goes against treatment guidelines.

The denied cystic-fibrosis patients are saying state officials are preventing coverage of Kalydeco because of cost. The drug, which is taken twice a day for the duration of a patient’s life, has a wholesale cost of $311,000 annually.

Specialty drugs like Kalydeco are becoming increasingly common. Spending on specialty drugs could reach $400 billion in 2020 from $87 billion in 2012, according to a UnitedHealth Group UNH report.

The rise in specialty drugs will add to the strain on government-funded insurance programs. Unlike Medicare, the federally-funded insurance program for the elderly which covers Kalydeco and many other high-price drugs, Medicaid is overseen by the state and only partially funded by the federal government.

These drugs are often more costly because of the money and effort required to develop the targeted treatment, and drugs for rare conditions are also more expensive due to the smaller patient population, industry officials say. But such medicines can often be more effective than older options because they target the specific genes that cause the disease.

Medicare: It’s a millennnial’s headache, too

As mid-term elections approach and presidential primary candidates begin looking toward 2016, we can expect the usual posturing for the senior citizen vote. In the last presidential campaign, we heard President Obama attack former Massachusetts Governor Mitt Romney’s Medicare reform proposal while Romney attacked Obama for cutting Medicare as a part of the Affordable Care Act. While national leaders fear that any proposed reform to Medicare or Social Security will be perceived as a threat to our most vulnerable citizens, we must have a responsible national conversation that leads to concrete and bipartisan entitlement reform. If reform does not occur, America’s younger generations will ultimately end up paying the price.

In 1970, Medicare and Social Security accounted for less than 20% of the federal budget, according to the Congressional Research Service. Today, these programs comprise approximately 40%. Meanwhile, government spending on investments, which include financing infrastructure, research and development and education has fallen to 15% today from over 30% in 1970, according to Third Way. By 2030, entitlements are expected to consume nearly 60% of the budget with Social Security and Medicare claiming most of these costs. The massive spending jeopardizes the sustainability of our nation’s entitlement programs and has taken away the government’s investments in innovation, investments, and education. It also contributes to our ever-growing national debt and will soon result in both massive tax increases as well as spending cuts. We may come from different political perspectives, but we both agree that action must be taken to address these crucial issues.

Clearly, something has to give. Two of the major drivers of entitlement spending are Medicare and Social Security. We must ensure that both programs are fairly and adequately funded for our parents and our grandparents while we sustain them for future generations.

Medicare currently operates with a fee-for-service model that many experts believe creates perverse incentives by rewarding doctors for prescribing more expensive procedures. It’s important to incentivize advanced-payment and care-delivery models that reward quality and value rather than quantity of care. It’s also important that Medicare undergo structural changes that promote efficiency– for instance, by combining Parts A and B, introducing cost-sharing for prescription drugs covered by part C, and by modernizing the Medicare benefit package.

It is critical to emphasize and incentivize health and wellness as well as participation in prevention programs so patients can receive treatment for maladies before they require expensive care.

Similarly, millions of America’s elderly including our grandparents rely on Social Security, so it’s critical to ensure fairness and solvency with whatever reforms emerge. Currently, the retirement age will gradually increase from 65 today to 67 by 2027, but to address the increase in life expectancy and the upcoming wave of baby-boomer retirees, the government should gradually further raise the retirement age to 69 and index it to life expectancy in the same time period. To increase the solvency of the program through funding measures, we believe that one important option that should be on the table is to increase the payroll tax cap so that 90% of wages would be taxed rather than the current 83.2%, which would eliminate 28% of the long-term deficit, according to the Congressional Budget Office.

Another option would use chained CPI, a more accurate method of calculating inflation, as the basis for benefit increases. Finally, to lower costs while maintaining fairness, we propose lowering benefits for Social Security’s wealthiest recipients to protect beneficiaries who need Social Security payments most. There are a range of options on the table. However, the longer we defer action, the more our generation will pick up the costs and the less likely it is that we will earn the same benefits as our parents and grandparents.

While reforming Social Security and Medicare will be challenging, we need all generations and both parties at the table. Both Republicans and Democrats have proposed ways to address the long-term solvency of both programs. However, if we come together for a true conversation without the partisan or generational posturing, Americans could find a bipartisan, consensus-based path forward. It’s time for millennials to have a seat at the table with our friends and relatives as well as our elected officials. It’s time for us have the conversation.

Henry Sandman, a rising senior at Lafayette College, is co-President of the Lafayette chapter of Common Sense Action, a bipartisan millennial grassroots group focused on advancing generational fairness, investing in millennial economic mobility and repairing politics. CSA has 24 chapters across 15 U.S. states. Kathleen Gayle, a rising senior at William and Mary, is the president of the CSA chapter and the W&M College Republicans.

How to shrink America’s debt? Start small

For the past five years, U.S. lawmakers concerned about the nation’s growing federal debt have been focused on relieving the problem by striking grand bargains in one fell swoop. We have had commissions, task forces, bipartisan “gangs” of senators, a “super committee,” and high-level negotiations between the White House and Congress. All tried their damnedest to craft a comprehensive bipartisan package that would tame the future growth of debt by slowing projected spending for major entitlements and reforming the tax system to raise more revenue. They failed.

It is time to think small. After the fall election, our political leaders may be tired of sniping at each other and ready to start governing again; they could start with three smaller bargains that are good policy on their own merits and incidentally reduce future debt. Here’s how:

First, let’s separate the costs of Social Security from budget discussions and ensure that it is solidly funded for current and future workers. Social Security is a successful program that has greatly improved the lives of older and disabled Americans, but by about 2033, the government may have to cut benefits by over 25% to stay solvent. Avoiding that catastrophe does not require restructuring the program–it just needs relatively small adjustments to benefits and taxes now to prepare for higher-than-expected ratios of beneficiaries to workers.

These changes can be phased in slowly and designed to protect the poor and the very elderly. The sooner we act, the smaller and less painful the required adjustments. If a crisis brings negotiators to the table, government funds dedicated to pay for disability benefits are in even more immediate danger of having to cut benefits.

Congress should resist the temptation to delay the day of reckoning with a temporary transfer to the disability fund and shore up both funds at the same time. Instead of treating Social Security as a political third rail, the parties could be competing to take credit for restoring fiscal soundness to this popular and essential program.

Second, let’s double down on efforts to reduce waste and improve quality in health care—not so much to contain Medicare and Medicaid spending, but to free resources that are now wastefully used for more productive purposes. We spend more on health care than any other country (close to 18% of U.S. GPD and rising), while studies show high levels of waste and inappropriate, ineffective care. It is not easy to change the entrenched practices of our fragmented health system or to stop rewarding volume of services (more tests, more pills, and more procedures) and start rewarding value and performance.

Traditional budget cutting tools—reducing provider fees or restricting eligibility for benefits (e.g. raising the Medicare age)—have perverse effects and shift costs to the private sector. Many promising reforms aimed at rewarding better outcomes for less spending are being tried by both private and public health providers and payers. We need to implement the most successful of these reforms on a continuous basis—a painstaking process of regulatory change that does not fit well into mega-budget negotiations.

Third, let’s begin to improve our complex, inefficient tax code—not primarily to raise more revenue, but to make it fairer and reduce the risks of any drag to the economy. Taxes are usually seen as an impossible hurdle, because Democrats want to increase what the rich pay and Republicans want to fight higher taxes. But with a little imagination there could be deals here, too.

Both parties recognize that the individual and corporate tax codes support billions of dollars of federal spending that masquerades as tax preferences. Many of these preferences—the home mortgage deduction, for example–disproportionately benefit upper-income people. The deduction could be converted to a credit that would help middle-income homeowners more and higher-income owners less. A series of such moves could make the tax code more progressive and broaden the tax base enough to allow lower rates across the board, which could appeal to both Republicans and Democrats.

Also, a carbon tax phased in slowly could help draw bipartisan support if it were paired with a move to reduce the top U.S. corporate tax rate. This deal could help U.S. companies compete with other countries enjoying lower rates, while raise revenues to help pay for new roads and other infrastructure.

The public wants their elected leaders to break out of gridlock and start solving the nation’s problems. A grand bargain that solves all issues at once is desirable, but a political system whose compromising skills have gotten terribly rusty had better start with smaller, more feasible deals.

Alice M. Rivlin is the Leonard D. Schaeffer Chair in Health Policy Studies, Director of the Engelberg Center on Health Care Reform and a Senior Fellow in Economic Studies at the Brookings Institution. She was a member of the Simpson-Bowles Commission and co-chair of the Domenici Rivlin debt Reduction Task Force.

How to run the U.S. health care system like a business

FORTUNE – Reports that corporations are looking to dump high-cost employees off their private health care plans and onto Obamacare reminds us yet again just how costly American health care is.

To understand why, take a look at one of the glittering monuments to both the greatness and dysfunction of America’s health care industry: The Proton Beam Accelerator, a high-tech machine that sends a beam of ionized protons into cancerous tumors, while limiting damage to surrounding tissue. It’s ideal for treating certain brain tumors and delicate work close to the spinal columns of babies; the machine is massive, costing hospitals about $100 million. Medicare reimburses about $32,000 for this therapy.

The trouble is that if you spend so much on a machine, you certainly don’t want it sitting idle – especially if you can bill tens of thousands of dollars for each therapy. As a result,a number of hospitals have widened its mission to include the treatment of prostate cancer. And now prostate cases account in some hospitals for 70% of the massive machine’s work load.

It just so happens that there’s another procedure for prostate cancer. It’s called Intensity Modulated Radiation Therapy (IMRT), and it costs a little more than half as much. Studies have shown that it is just as effective. Nevertheless, a lot of patients and their doctors opt for the proton beam, and it’s easy to understand why. If you’re dealing with surgery in a highly sensitive area of your body, wouldn’t you choose the Rolls Royce, the beam that can needle into the spinal column of an infant?

Well, if price is no object … sure!

And that’s the heart of the problem in health care, a $2.7 billion industry that was wildly wasteful and dysfunctional long before Obamacare, and remains to this day stubbornly impervious to reform. All too often, price is no object. For insured patients, the price often isn’t even a part of the decision making process. It’s usually shrouded in mystery. Only weeks later, when patients’ finally see the hideous numbers, do they shudder and pray that the insurer will make them disappear.

This is a market–using the term very loosely–in which the more expensive option wins out, in great part, because it’s more expensive! We consumers depend on this service for our lives, but we have little choice in the matter and often don’t see the money being spent. And that’s why rising spending on health care threatens to devour America’s economy.

How do we change this? My answer is to enlist a new force for change: The public. The key is to give people more choices, along with an economic stake in the reform. For example, what if Medicare offered a prostate patient a share of the savings – say $10,000 – if he switched from the proton beam to the cheaper IMRT? I’m betting that a lot of people would take that deal. It would save taxpayer money while creating a bloc of citizens who benefit from reform. Curious where would the $10K come from?

In that hypothetical transaction, the person is given a choice, a more expensive option versus a cheaper one. We face such choices every day, whether we’re deciding between a Lexus and a Ford Focus or a slab of swordfish and filleted tilapia. We shop. We pride ourselves on the choices we make, and those choices represent formidable power. We force companies to bend to our needs and desires, and to our budgets. Our shopping choices kill big companies and create new giants. They also drive innovation. They create the market economy.

This is precisely what health care needs. However, health care, as it exists today, is the antithesis of a market. Consumer information is scarce. Prices are hidden. A host of incumbents, from leading research hospitals to the government, preserves this lucrative status quo. Patients? They’re virtually powerless, and treated largely as problems to fix and procedures to bill for.

It doesn’t have to be this way. If we demand choices, along with the information we need to make them, we can turn health care into a real marketplace, with competition, innovation and sustainable economics. Only by shopping will we get the health care we want and deserve.

GOP Medicare bet: There’s a market for bold

Want to know why the federal government is shouldering a $14.3 trillion debt, why that debt could equal 77% of the total economy by 2021, and why we face market whispers of a looming “debt crisis” that could sink our nation’s finances?

Just lean in and listen to Bill Clinton’s private, off-stage whispers last week to gladiator GOP House Budget Chair Paul Ryan — care of ABC News. “I’m glad we won this race in New York,” Clinton told Ryan at a Pete Peterson Foundation forum on the national debt. But “I hope Democrats don’t use this as an excuse to do nothing.”

While Clinton opposes Ryan’s sweeping plan to revamp Medicare, the President who once declared “the era of big government over” knows that “doing nothing” is the current default position of his Democratic colleagues in the White House and on Capitol Hill as they prep for a difficult 2012 election amid a still stuttering economy. Last week’s special congressional election in New York — a Democratic victory built largely on accusations that Republicans want to gut Medicare — is being trumped by liberals and much of the media as proof that serious efforts to contain entitlement costs is political folly.

Now listen to the words of widely respected House Minority Whip Steny H. Hoyer — a Democrat known for his sensible centrism. Hoyer told the Washington Post that Medicare reform “needs to be on the table.” But then he confessed that he doesn’t want to risk a backlash by identifying specific changes. “That is the same mistake that Ryan made.”

Wow, that’s gutsy.

Gutsy on the part of Democrats might mean embracing their own serious reform. There are other reform plans out there, like the one proposed by the Committee for a Responsible Federal Budget to increase Medicare deductibles, coinsurance and co-payments. This would help control costs “by shifting costs from the taxpayer to beneficiaries, and by making beneficiaries more cost-sensitive and therefore more selective in usage of care,” the committee says.

Another Medicare proposal gaining traction on Capitol Hill, crafted by Senator Pete Domenici of New Mexico, a Republican, and former budget director Alice Rivlin, a Democrat, would cap federal spending and include a voluntary premium support system — providing subsidies to purchase private insurance alongside traditional Medicare. It’s a less radical departure from the current system than the Ryan plan but can still save money.

But any shift away from the current system, now tumbling toward bankruptcy, will provoke powerful organized interest groups. The influential AARP has opposed premium support systems, and liberal activist groups are having a field day against Republicans who promote Medicare reform. They’ve produced a video of a look-alike Paul Ryan tossing Grandma out of her wheelchair and over a cliff.

And the union-backed Americans United for Change (first organized in 2005 to oppose President Bush’s attempt at Social Security reform) attacked GOP Senators Richard Lugar of Indiana, John Thune of South Dakota, and Marco Rubio of Florida for voting to support Ryan’s “radical” plan to destroy Medicare “while giving $4 trillion in new tax breaks to millionaires, big oil, and job-outsourcing corporations.”

“Savage,” “radical,” and “mean-spirited” are among the favored Democratic Party labels for Medicare reform, while media allies like the Washington Post denounce Ryan as a “shameless demagogue.” A political conventional wisdom is hardening around the view that Ryan’s Medicare plan was the reason behind the New York special election loss-and that it will certainly hang as an albatross around the GOP’s neck in 2012.

Republicans are betting, though, that there is a political market for bold. (Democrats might take note: Courage sells — just look at New Jersey Governor Chris Christie). The 30-second case for Medicare reform is not hard to make: Absent reform, the system goes bankrupt in about a decade; a May 13 trustee report predicts that money slated for hospital care will run out in 2017. Doing nothing equals a death sentence for the system.

Far from treating Ryan like a pariah, all but five GOP senators last week voted in favor of moving forward to consider his Medicare plan (and one of those opposed, Rand Paul, didn’t think Ryan’s plan went far enough). And there are renewed efforts to recruit the young Wisconsin congressman for the 2012 GOP presidential race.

For Americans under 55, Ryan’s redesigned system would provide subsidies — more for those who are poor and in the worst health, less for the wealthiest — to purchase private insurance in place of today’s direct coverage. The plan is designed to contain costs by having insurers and providers compete for seniors’ dollars — lowering federal health care spending from 8% of GDP today to 5% by 2050.

You can argue about whether the Ryan plan imposes too much burden on seniors, and whether his specifics are the right one. But it’s hard to argue in favor of anything that looks like the status quo. That’s the direction Democrats who control the White House and the Senate seem to be heading.